For all loans this year where the borrower has ANY kind of self employed income feature, they will have extra steps to go through after 2010. This means that even if they have a very passive (anything more than 5% or total income; positive or negative) business or a rental property or anything like that, they’ll be put through the Spanish Inquisition of income documentation.
What’s more important as a Realtor, is that you’re working with a loan officer that is very proficient in tax transcript analysis and knows how to prepare an accurate Self Employed Income Analysis quickly (an example of this form is attached). The reality is that most loan officer either don’t have a clue how to do these or aren’t very proficient with them and end up stumbling through them and taking forever to figure out the “real” qualifying income.
It used to be that a lot of these borrowers qualified for their loans going “stated” or using a “liar’s loan.” Then, lenders starting pulling an IRS 4506t form that gives them a summary of the filed taxes and if it supported what was in the loan application, that was good enough. No more. Now, the self employed income analysis will need to be in there. For my own part, I’ll be putting the analysis form in there along with underwriting cover letters describing my basis for income calculation (a cover letter is just a narrative that get’s right to the point because some underwriters are dumb and the good ones are busy – I’ve attached an example).
If I were a Realtor, I’d be adding some steps this year to prepare for this. First of all, if you don’t already, you might want to help your loan officer collect documents for your buyer because it’s a lot for borrowers to do in a timely fashion but it’s necessary. Secondly, AND THIS IS IMPORTANT, when representing a seller and getting pre-approvals with purchase agreements, ask if the buyer is self-employed in any way shape or form. If they are, then follow up by asking for a copy of the income analysis to be certain that it’s been done because, if it hasn’t, that pre-approval isn’t worth the paper it’s written on. If they won’t show the income analysis to you, then make sure to get a hard financing contingency and/or add special language to the financing addendum. Here’s an example:
“If the buyer’s financing should fall through due to debt to income ratios, inconsistent income, failure to provide necessary income documentation and/or any issue concerning self-employment, buyer agrees to forfeit all earnest money to seller.”
This kind of language is not unfair because all of those grounds for loan denial are detectable in the loan origination process by a quality loan officer.
I’m attaching the announcements from Freddie Mac on this matter and have highlighted in yellow the relevant sections (Fannie is doing it too but I figured this was good enough). If you’re not sure if your loan officer is up to snuff on this, invite them over to your office and, without telling them, throw down your tax returns, tell them to do a self employed income analysis on you and judge for yourself.
Sorry I forgot to mention this earlier and good luck and fortune in the New Year!
Charles Dailey – Branch Manager, Loan Officer, Certified Military Housing Specialist – CA DOC, MN DOC & WI DFI – NMLS ID# 79048
The Home Buyers Scouting Report® is provided directly to the buyer by HBM II, a licensed national real estate brokerage service company, not to or through a lender. The FREE home finding service is provided directly to prospective homebuyers by HBM II and its real estate brokers, as part of their ordinary real estate brokerage services. HBM II, Inc. works cooperatively with other real estate agents across the United States in attempting to find ready, willing and able buyers for homes listed for sale. The role of the Preferred Loan Officer is to assist in determining a comfortable home price range for Home Buyers Marketing II, Inc. (HBM II) to use when it is searching for property listings within the buyer’s search criteria.
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